Article Guide to Pairs Trading – Part 2

T2W Bot

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Fundamental and Technical AnalysisPairs traders employ either fundamental or technical analysis, or a combination of the two, to make decisions regarding which instruments to pair, and when to get in and out of trades. Many pairs traders apply technical analysis techniques and then confirm the findings using fundamentals. This extra “layer” of analysis can be used simply to ensure that the trade “makes sense”. For instance, if all technical analysis points to taking a long position in stock ABC and a short in XYZ, but the fundamentals show that stock ABC will have a weak earnings report, the position may need to be reconsidered.
Fundamental factorsFundamental analysis examines related economic, financial and other qualitative and quantitative factors to evaluate a security’s value, and to determine which security will perform better in the short-term. Fundamental analysts may consider a number of growth and value factors when identifying opportunities for pairs trading...
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tomorton

Legendary member
7,443 1,005
Extremely concise and clear summary of pairs trading.

Still not a convincing strategy for me though - double the research burden, double the transaction costs, quadruple the complexity - but the reduction in risk seems quite modest.

On top of which, the worst possible outcome for a position built around two instruments is likely twice as serious as if built only around one. Even if the worst is less likely to happen for a pairs trade than a unilateral trade, it can't be eliminated and ignored.

Then again, maybe there are retail traders reading this out there who are making this work?
 

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